Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 41

The owner of Ace Roofing may invest $200,000 in new equipment. A life of 6 years and a salvage value of 12% of first cost are anticipated. The an­nual extra revenue will depend upon the state of the housing and construction industry. The extra revenue is expected to be only $20,000 per year if the current slump in the industry continues. Real estate economists estimate a 50% chance of the slump lasting 3 years and they give it a 20% chance of continuing for 3 additional years. However, if the depressed market does improve, during either the first or second 3-year period, the revenue of the investment is expected to increase by a total of $35,000 per year. Can the company expect to make a return of 8% per year on its investment Use present worth analysis.